Wednesday, April 23, 2014

The California Court of Appeals, Second Appellate District, recently held in a lender's favor in a conversion action, where the a car repair shop endorsed an insurance check to a consumer, despite the fact that a lender had an equitable lien in the insurance proceeds. In so holding, the Court rejected as irrelevant the repair shop's defense that it had no knowledge of the lender's interest.

A consumer financed his purchase of a car with a credit union. Their agreement provided that the car was collateral for the loan, and that the consumer was required to maintain insurance for the car, with the credit union named as an additional insured on the policy.

The consumer did insure the car, but failed to name the credit union on the policy. When the car was damaged, the consumer took it to a repair shop. The insurance company estimated the damage to the car, and produced a check for the estimated amount made out jointly to the repair shop and the consumer. The repair shop's owner, who did not know that the credit union had a lien on the car, endorsed the check at the consumer's request. The consumer cashed the check without engaging the repair shop to complete the repairs. Neither the repair shop nor the credit union received any of the insurance money.

The consumer stopped making payments on his car loan, and filed for bankruptcy. The credit union repossessed the car, paid for the necessary repairs, and instituted an action against the owner of the body shop for conversion. The lower court found in favor of the credit union, and the owner of the body shop appealed.

As you may recall, under California law the elements of a conversion claim are (1) the plaintiff's ownership or right to possession of the property; (2) the defendant's conversion by a wrongful act or disposition of property rights; and (3) damages. Neither knowledge nor intent on the part of the defendant is necessary for the plaintiff to prevail. See Burlesci v. Petersen (1998) 68 Call.App.4th 1062, 1066.

On appeal, the Court upheld the trial court's decision. The Court first established that, due to the parties' contractual obligations, the credit union obtained an equitable lien on the proceeds from the consumer's insurance policy. Further, the Court cited precedent establishing that an equitable lien is a property interest that can be converted. See Mcafferty v. Gilbank (1967) 249 Call.App.2d 569, 574-76.

Therefore, the Court held that "[b]ecause the Credit Union had an equitable lien in the insurance proceeds, with which defendants interfered when [the repair shop owner] endorsed the [insurance company] check, defendants are liable for conversion."

The repair shop owner argued that he was unaware of the credit union's interest in the vehicle, and further explained that endorsing checks from insurance companies was his regular practice -- because he kept his customers' vehicles until he received payment, endorsing the checks did not subject him to financial risk.

The Court found this argument unconvincing, noting that a defendant's knowledge or lack thereof is irrelevant in a conversion action. Accordingly, it affirmed the judgment of the lower court.

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